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Investments

Watt as FHFA director: A sharp policy shift

President Obama’s expected pick of Rep. Mel Watt, D-N.C., to replace Ed DeMarco at the Federal Housing Finance Agency would put the regulator on course to rapid changes with a politically charged figurehead replacing a financial regulator, analysts suggest.

At early glance, his nomination is likely untenable, according to sources.

While Edward Mills, a senior vice president at FBR Capital Markets, calls the many hurdles to a Watt's confirmation high, the mere suggestion of a sharp policy shift at the FHFA is raising eyebrows across Wall Street and Washington D.C.  

Whereas DeMarco is viewed as a practical, nonpolitical financial regulator, Watt is a politician who has gone on the record asking for principal reductions, eschewing concerns of taxpayer losses and systemic risks that have kept DeMarco constrained.

Mills sees DeMarco as a figurehead who might say let's spend a dollar today to save more money tomorrow, while Watt’s philosophy aligns with an administration that says spend $5 today in the hopes that it will cost less and save more people tomorrow.

But as Mills points out, DeMarco is cut from the cloth of a financial pragmatist, a regulator who has to pay the bills and keep the government-sponsored enterprises running without overtaxing the public.

Watt conversely is tied to a president and a philosophy, and it's unknown whether pragmatism can shift his philosophy at some point.

"One of the hallmarks of the DeMarco tenure is that he was a nonpolitical figure before accepting this job," said Mills. "Since then, he has taken his stand as conservator very seriously and has been resistant to pressure from the Hill," he added.

"Watt has been pushing for cram-downs and other GSE reform efforts," Mills added. "What he was pushing for versus what DeMarco is okay with supporting are diametrically opposed positions."

The lingering question, Mills said, is whether Mel Watt as FHFA leader will be different from the political figure who has strongly opposed DeMarco’s resistance to principal reductions.

"Are they the same person or would he be forced to change his views?” Mills asks rhetorically. "It seems he believes DeMarco could have been more aggressive in helping underwater homeowners."

Despite a general wariness of a sharp policy shift in FHFA policies, Mills views a Watt-leadership era at the GSE conservator as unlikely.

FBR Capital says "Ultimately for a director to be confirmed, we believe Senate Republicans will demand a detailed plan for GSE reform. Republicans (such as Sen. Corker) have publically stated they know and support DeMarco’s GSE reform plans, but need a plan from the administration before supporting a replacement."

kpanchuk@housingwire.com

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